Diwali! The festival of lights is around the corner.
Diwali signifies different meanings for its grand celebrations. It is the day of celebrating Lord Ram’s victory over devil King Raavan as well as Diwali is the auspicious day for Lakshmi Ganesha Puja.
This Diwali let’s not just do Lakshmi Pooja and pray for the prosperous year ahead. Let’s work on it together.
Personal Finance is a wide subject to cover. Let’s start with the basics of Personal Finance.
You may say this is back to the basics, we all are aware of the basics but reminding things over and over helps the concepts to get deep into our minds. It helps you to keep your track & remain debt free.
The very basic elements for anyone’s personal finances include making a personal budget leading to savings and investment planning, managing your income and outgoings resourcefully as well as applying for loans and finance and various insurance policies you may need over for coming times.
As per Investopedia the definition of Personal Finance is
“All financial decisions and activities of an individual, this could include budgeting, insurance, savings, investing, debt servicing, mortgages and more. Financial planning generally involves analyzing your current financial position and predicting short-term and long-term needs.”
Many say Personal Financial planning can best be self- accomplished, I don’t think so.
I would suggest if you don’t know where to start, talk to a financially savvy friend or financial advisor.
The most important lesson one must learn about money is that it is a limited resource and, therefore, holds an opportunity cost at all times.
The very first rule of personal finance must always say: ‘Pay yourself first!’
What does paying yourself first mean? It simply means taking a fixed amount or percentage of your income and saving it beforehand.
Income –Savings = Expenses must be the rule to be followed and not the vice-versa.
Keeping records of your financial transactions provides the foundation for everything else to build on. The simplest one can begin with is by enrolling in automatic retirement savings plans.
Have you heard of the 50-20-30 Rule popularized by Senator Elizabeth Warren?
If yes, that’s good as you must me working on it.
If not, let me introduce it to you.
The rule simply says one must at least keep aside 20% of their income aside as savings for your short long or medium term goals; next comes 50% of the income which goes towards necessities & living expenses such as household expenses, including groceries; while 30% goes towards discretionary items spending, including outing, food and travel.
It’s not necessary that one size fits all, based on your income if you want you can start with less percentage of savings and increase it gradually as the key point is just to get you in the habit of saving. Even if that means you start small, it’s a start. And seeing your money grow can be very motivating helping to take further steps ahead.
The second rule of personal finance must say: ‘ Expect financial emergencies’
One could experience a setback to one’s earning capacity due to a temporary disability, ill health or being unemployed for a few months.
When it comes to handling financial emergencies many turn towards the funds collected for retirement or if not borrowing money or may be selling something.
Is that correct?
Always remember an emergency fund is not aimed at meeting your planned goals, but it only acts as a safety net which prevents you from falling in Debt.
When it comes to emergency funds there is no specific rule for it to be followed, it must be an amount which can help you combat you with financial emergencies.
If required you can start with taking a small percentage off your income.
Next, we come towards Insurance the third rule
Once you’ve got your debt queries squared away & you’ve figured out your money management and savings strategy it’s time to discuss Insurance.
Having necessary and sufficient insurance coverage for you is one important aspect of managing personal finance.
We don’t want to see our hard earned money to be wiped out by an act of nature or say negligence. Whether it’s your house, car, health or even life, we need to make sure we have enough insurance for anything worse that may happen to us.
Just like the emergency funds Insurance is important because it protects a person or entity from extreme financial loss or responsibility due to an unfortunate emergency, accident or negative unforeseen event.
The most cost-effective way of buying life insurance would be through a pure term insurance plan which is a low premium, high-cover protection plan where the premium goes entirely towards risk coverage.
Fourth rule Investments
Investing is like planting seeds; you nurture the planted seed and harvest the fruits of in the coming time in repeated fixed time intervals.
One of the primary reasons investing money is important is that it helps one to create more money. As opposed to just saving money in a bank account with fewer returns, investing money involves choosing to use that money to provide you more interest or investing stocks or mutual funds in order to earn a return on the money.
Savings help you in meeting and managing your short-term goals while investing provides returns and helps you grow your capital this, in turn, helps you to fulfill your financial goals.
The Fifth and most important rule!
It’s not the money, it’s what you do with it that counts.
It is the tendency of people to spend everything they earn and a little more besides, usually supplemented by loans and credit card debt which prevents them from attaining them their financial goals.
The practice of self-discipline can help one attain the projected results.
I agree ‘It’s not always easy to build discipline in any area of your life, but when you make the effort, the rewards are definitely worth it!’ remember why you started and carry on.
If you want you can push large, discretionary spends to the end of the month, I think that might also be a good idea. End of the month spending would feel like a treat like a well-earned reward for exercising discipline throughout the month.
You should always make personal finance fun and be a motivated saver this has helped many save regularly and invest in such where they could earn interest or dividend.
Like many say:
Getting a handle on managing your basic personal finance administration can return many financial rewards including providing you with more free time to pursue your interests and freed up money to further invest.
These above thumb rules will help you build a strong foundation for your personal finance management which reminds me of what Gordon B.Hinkley had once said
You can’t build a great building on a weak foundation. You must have a solid foundation if you are going to have a strong superstructure.
Keep in mind to personalize your finances according to your risk profile and situations.
Once you have made a start using the thumb rules, it is important you review things time to time and make any required changes to your plan accordingly.
The thumb rules would come in easily for youngsters and newbies, who are beginning with their finance planning in getting their initial direction others who are in the middle of their career path but have lost the track of their finances remember better late than never and take hold of your finances using the thumb rules.
The Choice is yours!
The most important thing is to get started.
Hope you find the article helpful.
Have any of you made your plans?
Share your views! Who knows your plans or story may inspire other fellow readers!
Until next time we wish you a Happy Prosperous & Safe Diwali!
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